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Sunday, October 4, 2009

Investment in the stock markets is something that many of us do very often and in many cases we end up suffering a loss. This is usually due to an error in judgement while choosing an investment instrument. This article is about the most common mistakes We as investors commonly make. Judging the market perfectly always is something nobody can do. Predicting market movement is a complex task and the chances of picking out a multibagger is the nearly the same as picking up a disaster of a stock. But, what we can do is, to be careful and take some precautions to ensure we dont lose our hard earned money.

The First Mistake: Going by word of mouth Tips

This is something we do all the time. A friend tells us a news about a stock that he heard from someone. The stock is expected to double or triple in a specific time and the friend went ahead and bought the stock. Most of us are tempted to go ahead and buy it ourselves. In all probabilities the stock could be a disaster and we can end up losing all our money. I did the same mistake when I started investing. A good friend of mine, who is a long term player suggested I buy stocks of a company that was expected to double up in the next 2 months. Believing my friend and his experience in the markets I went ahead and bought a decent number of shares of that company at Rs. 9.5/- each. The first week the stock reached a price of Rs. 10.5/- and I thought maybe my friend is right. But in the next few weeks the stock price started falling and currently the stock is trading at Rs. 0.75/- per share. I am glad that my exposure to this stock was less than 2% of my portfolio's worth and hence the profits I made out of the other stocks helped me recover the huge loss this stock brought to my portfolio.

The lesson is - Never rely on word of mouth tips. Do your own analysis. Find out more details about the company, its history, profit making capability etc before investing in it.

To learn some tips on how to pick a stock for your portfolio Click here

Mistake No 2: Not admitting making a mistake

People stubbornly hold on to stocks where they are making sizeable losses in the belief that they can exit when the price reaches their buying price. Most of the minds are not trained to acknowledge the fact that they have made a mistake and probably the best thing is to move on.

Mistake No 3: Buying on tips and emails from brokers and wanting to make a quick buck

Technology has made our lives much easier but at the same time has caused a lot of overload as well. We are subject to SMS's, emails and flyers with lucrative offers for “buy and sell tips” , commodities trading etc. that at the end of the day leave us confused. In this state only two things can happen, (a) One is that we procrastinate and not take any action with the fear of screwing it up or (b) Succumb to these offers for making us rich quickly.

Either ways the probability of facing a loss is pretty high. Never buy a stock until you have done your own analysis of the stock that you are going to buy.

Mistake No 4: Buying a disaster on its way down thinking you are averaging your costs

Mistake No 5: Ignoring Stock market Risks and looking only at the returns

Risk is an integral part of every equity investment and some equity investments are more risky than others. People however look at the returns without giving due importance to risk. Stock Futures can give you great returns but at the same time they can wipe out your capital as well. In the mutual fund context, people look at returns when investing in the fund, but do not consider the kind of risks the fund manager has taken whether it be concentration in stocks or sectors etc. At the same time betting heavily in Futures & Options, Commodities without understanding the nuances of the same is fraught with risk. Understand the risk i.e the downside inherent in every investment and volatility associated with it.

Mistake No 6: Buying penny stocks thinking they are cheaper and ignoring quality stocks, which are priced above a certain number like Rs. 1000/- or more thinking, they are expensive.

In most cases such blue chip stocks can give us better returns than a penny stock. For example the returns on one share of Reliance Industries stock bought at the beginning of the year 2009 when it was trading at around Rs. 1000/- on the current date could be more than the returns on 100 shares of stocks that are around the Rs. 10/- mark. The price of a stock must not determine our decision to buy it/

Mistake No 7: Exiting Winners early to make a small profit and sticking to Losers

Mistake No 8: Just thinking but not doing anything

This is probably the biggest mistake of all. Thinking about investing but doing nothing. Finally doing makes all the difference. There is no substitute for action. Just knowing that exercise is good will not keep you fit. In the same vein, just knowing this stock is good is of no use unless you buy it.

Some common statements from such people are:

“I knew this stock would do well, wish I had put in money here” or “I missed a good time to enter this stock. It is too costly to invest now”

Whatever the reason be, in the end what matters is whether you did what you knew was right. A better option for people here is to put their investments on Autopilot - Choose quality mutual funds - investing fixed amounts every month in them.

To be a successful investor and create wealth through equities, you should shun & try to avoid the mistakes outlined above. And yes if you have made any one of the above mistakes, admit it and correct it. Mistakes are common. Even the best equity investor in the world would have made mistakes at some point of his time.

Every Investor is looking for the next hot stock tip. A stock whose price will double or triple in a few months. However, one of the often ...

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All the contents of this blog are the Authors personal opinion only and are not endorsed by any Company. This website or Author does not provide stock recommendations. The purpose of this blog is to educate people about the financial industry and to share my opinion about the day to day happenings in the Indian and world economy. Contents described here are not a recommendation to buy or sell any stock or investment product. The Author does not have any vested interest in recommending or reviewing any Investment Product discussed in this Blog. Readers are requested to perform their own analysis and make investment decisions at their own personal judgement and the site or the author cannot be claimed liable for any losses incurred out of the same.